You are a long-term investor and your job is to stay invested. Over the long-term, the markets reward discipline. So keep calm. Don’t start taking action just because you are bored and not getting a 12% return this year. Don’t be fooled into taking unnecessary actions.
If you think you are a long-term investor, then here is the truth – Its not easy.
Just calling yourself a long-term investor is easy. But being one, year after year, for a decade or two, is not easy. Period.
The problem with markets is that it does not know that you are investing your hard earned money in it. It does what it does best. And that is – be volatile.
Just look at the following graphs:
Period 1: A fall of 20%-25% in about 6 months
Period 2: A fall of more than 20% in less than 2 months
Period 3: A fall of more than 50% in less than 15 months
Period 4: This is recent one. A fall of about 15% in less than 6 months.
This is how the markets operate. There can be some really volatile moves that can throw everyone off balance.
At times, falls are small – 10%, 15% – types.
But at times, these falls can be as much as 30% or even 50%!
Just think about it. How would you have felt when your portfolio was worth Rs 50 lac at the end of 2007 and fell to almost Rs 25 lacs by early 2009?
Horrible might be an understatement. Seeing your hard earned money evaporating in front of your eyes is not easy. It’s painful.
Your faith in equities would have been shaken.
It’s even possible that your family might have turned against investing after such a fall in your portfolio.
This is real long term investing my friend.
It comes with its share of unbearable pains and temporary losses in short term. It will test your patience. It wants to test your mettle. It wants to see if you have the heart* to follow through when the going gets tough.
* I would have used the word ‘need’ here. But thats an obvious thing. There is ofcourse a need to invest for almost everybody.
But in long term, the general trend remains up.
Combine all the above graphs and this is what you get:
Looks like a decent upmove in last 15 years. Isn’t it?
But it’s easy to look at above graph and say that markets ‘will definitely’ move up in long term. It’s a different ball game altogether to remain invested during severe falls and be brave enough to buy more.
So if you feel that Dev is saying that 12% CAGR for next 15 years will make you a Crorepati, then you need to be cautioned a little.
This 12% is the AVERAGE. It does not mean that you money will grow exactly by 12% every year. That is how averages work.
In fact, a very successful long-term investor Howard Marks once quoted:
Never forget the 6-foot tall man who drowned crossing the river that was 5 feet deep on average.
Do not forget that the range of depth of the river can be between 2 and 10 feet. 🙂
Same is the case with markets.
A 12% average expected returns means that there might be a sequence of returns like one below:
+20% : -15% : +7% : -35% : + 20% : +40% : + 15% …..and so on.
The average of such a sequence might mathematically result in a CAGR of 12%.
Markets will never do something like this:
+12% : +12% : +12% : +12% : +12% : +12% : +12%…..
So just because markets have been doing great in recent past, don’t start thinking that it will go up in a straight line in future too. It will fall and it will rise.
The markets overestimate and then underestimate. This leads to over-reactions and then to reversion back to means.
It is very important to understand that markets don’t just go about in straight lines. Neither up nor down. Every calendar year cannot be an UP year. Infact at the start of 2015, I am sure that given a 30% rise in 2014, most experts and common investors would have felt that markets (Sensex) will be at 30,000 or 35,000 at end of 2015. The same doesn’t seem to be happening.
Just because markets did well last year does not mean that this year too will be good. Infact, statistically speaking and using the concept of mean reversion, chances of having a bad year after a good year is quite high. So don’t give too much weightage to short-term fluctuations.